Property Tax

Are you a buy to let investor or property dealer or developer?

Property tax is a bit of a maze and we can advise you on issues such as...

  • Tax reduction strategies for rental income;
  • What is a repair and tax deductible and what is capital and not;/li>
  • When to use a Limited Company to save tax;
  • Trading income versus Capital Gain considerations and advice;
  • Capital Gains rollover and holdover considerations;
  • Stamp Duty planning;
  • Tax efficient mortgage structures;
  • VAT considerations of property deals;
  • Making the most of the Principal Private Residence election;
  • Tax issues on the sale of part of your residence;
  • Second homes;
  • Inheritance Tax angles.

CGT and Your Principal Private Residence

The sale of an individual's home is normally exempt from CGT, with neither a taxable gain or loss arising. This is certainly the case where it has been the individual's only or main residence throughout the period it has been owned, or if owned prior to 31 March 1982, then the period since then.

However there are times when a taxable gain or loss can arise. For example the profit arising on disposal may be taxable or partly taxable in any of the following situations...

  • Where the individual (both spouses/civil partners who are treated as one for these purposes) has two or more residences. In these circumstances the individual can elect within 2 years of acquiring the second property as to which property is to be treated as the only or main residence and therefore exempt from CGT purposes. The property chosen must be a residence of the individual, i.e. it must be lived in as a home for some part of the year, although it does not have to be the main residence as a question of fact as to which property is the main residence. It is possible to change the election at any time after it is made, and can be backdated for a period of up to 2 years to the date when the second property started to be used as a residence.
  • The property has been let out whether fully or partly. There is no problem with a lodger if they live as part of the family and individual still occupies the property but other than that, the part of the gain apportioned to the letting period is taxable but is reduced by the lower of...
    • £40,000 and
    • an amount equal to the exempt gain
  • There has been business use of the property. However, entrepreneurs' relief may be available on this proportion of the gain and it also doesn't apply if no part of the residence has been used exclusively for business purposes, so it's possible that storing your golf clubs in your office may do the trick!
  • The property is bought for a short time, lived in and then sold in order to make an exempt gain. To take advantage of the exemption for a private home that the property is bought for the purposes of residence and not for making a gain. There is no fixed time period during which the home should be occupied, as it is the intention that counts. In addition if properties are bought and sold on a regular basis there is a very real danger HMRC will want to treat the repeated profits as income from a trade, subject to income tax and national insurance and not just a Capital Gain.
  • The garden is larger than half a hectare (approx 1.25 acres) and is out of keeping with the particular size and character of the property. In other words it more than would be needed to occupy and enjoy the property based on current living requirements, not the requirement for land as existed when the property was built.
  • The garden (whatever the size) is sold after the residence has been sold, this would then be taxable.

Periods of absence. When the property is not occupied as the taxpayer's main home any gain that arises in those periods of absences is potentially taxable. However f some periods of absence are not chargeable, with only the excess of following periods being chargeable...

  • The last 3 years of ownership as long as the property was the only or main residence at some point prior to that;
  • Up to 3 years for any reason - such periods do not have to run continually as long as it was the only or main residence at some time before and after;
  • Where a previous residence is being sold, or the property is being prepared for occupation, up to a year (occasionally 2 years) is treated as it is were a period of residence;
  • Up to 4 years where the duties of a United Kingdom employment require the individual to work elsewhere, again as long as it was the only or main residence at some time before and after unless prevented from doing so by the work;
  • Any time when employed abroad as long as it was the only or main residence at some time before and after unless prevented from doing so by the work;
  • Periods of absence prior to 31 March 1982 are ignored in calculating the chargeable gain;
  • Where there is job-related accommodation related to employment such as minister of religion or public house tenant, you can purchase a property while working and living in that job related property, for the purpose of being your future home but not live there and that property will be exempt from CGT, even if you never live there, so long as the intention to do so was there until sold.

Dependent Relative Relief for pre 5th April 1988 properties. Where the property is owned on 5th April 1988 that has been continuously occupied rent free by a dependent relative since then, the property becomes exempt from CGT. This exemption ceases if there is a change of dependent relative occupier.

Taxation of Buy to Let Properties

Here are some of the main points to be aware of...

  • The income is treated as the profits of a Property Income Business. If the owner of the property is an individual or a trust the profits are charged to income tax for the tax year to 5th April. If the owner is a company the profits are charged to corporation tax for the accounting period of the company. Although letting property is generally regarded as an investment activity, the accounting rules for working out trading profits are applied. Allowable expenses are broadly those whose benefit is only felt in the immediate period, and do not affect more than one year. The costs incurred must also be wholly and exclusively for the purposes of the letting. So for example, an adjustment must be made where there is a private element of the expenses. Interest payable on a loan to acquire or improve the property is allowable.
  • Capital allowances are not available on plant and machinery used in dwellings. However, owners of furnished properties can claim a wear and tear allowance of 10% of the net rents to allow for the cost of replacing furnishings, etc. Net rents is the rent less any expenditure that would normally be incurred by the tenant, such as heat and light. This is normally the best option although it is possible to claim relief for furnishings and fittings on a renewals basis whereby no relief is given for the original cost but full relief is given for the replacement cost when that occurs.
  • The cost of repairs can be set against the rental income, but it is often difficult to distinguish between repairs and improvements. Where a fixture is replaced with a similar fixture this will usually be an allowable deduction as a repair but where a new fixture is installed where one did not exist before or the size or quality of the replacement fixture represents an improvement in the value of the property no tax deduction is given against the rental income. The tax relief for improvements is given when the property is sold.
  • Landlord's Energy Saving Allowance - landlords that incur capital expenditure up until 5th April 2015 to install loft insulation, cavity wall insulation or floor insulation in residential property may claim a deduction against rental profits of up to £1500 per property.
  • The expenses and income of different properties owned by one person in the UK are pooled together in any one tax year, to reach an overall profit or loss for the letting business. Any overall loss is normally carried forward to set against later rental income. However, relief is available for excess capital allowances to be set against other income of same and/or following year.
  • When the property that is let is situated abroad the calculations of taxable income are very similar, but tax may be payable in the country where the property is situated, as well as in the UK.
  • Where the landlord of a UK property is non resident, basic rate tax should normally be deducted at source from the net rental income by the letting agent or by the tenant, unless HMRC have agreed that the landlord will complete a self-assessment tax return in the UK.
  • There are special advantageous rules which apply to properties which qualify for furnished holiday lettings.
  • Capital gains on the sale of buy to let properties are taxed at 18% or 28%.

Using a Limited Company to Save Property Tax

The analysis of whether it is beneficial for a property investor to use a Limited Company can be complex and this helpsheet aims to identify some of the key advantages in considering a Limited Company for this purpose.

Any decision must be carefully weighed up after examining your own circumstances.

Here are some advantages of using a company...

  • Low Tax Rates Small limited companies only pay tax at 20% (2012/13) on profits up to £300K and only go as high as 24% whereas a higher rate individual taxpayer pays tax at 40% or 50%, which is a large difference. Corporation tax rates are also due to decrease in future years. If you or your spouse/ civil partner already control another company that existing company could be associated with the property and increase the tax rates for both companies. Also where the sale of property is a capital gain as opposed to trading profits, individuals only pay either 18% capital gains tax or 28% for higher rate taxpayers.
  • Company money box By leaving money in the company and reinvesting, the tax savings can be used to grow property portfolios at a much faster rate. Property development in particular is a trade and liable to income tax as opposed to capital gains tax and so can be better off in a company. However in the longer term you do still have to consider how you are going to extract your funds in a tax efficient manner from the company, which may incur a further tax charge down the line.
  • Use of Dividends By using a limited company profits can be paid out in the form of dividends which avoids any type of national insurance payment. You can also time the taking of dividends to when you want them and so avoid going into personal higher rate tax bands by leaving the money in the company.
  • Ownership transfers A property held in a company could be transferred more easily by means of share transfers rather than actual property transfers and also saves on stamp duty payments.
  • Property Management Companies Sometimes a Limited Company is not wanted to hold the property but as a property management company to be used instead to manage the property and divert income into it instead and so save tax.
  • Limited Liability As always its not just about the tax savings. Building sites can be dangerous places and tenants can have accidents. A limited company will limit the amount of your liability in these cases.

Whether a limited company is right for your property empire will depend not only on the present circumstances but your plans for the future.